By Mike Shustek
One of the best ways to make money work for you is to invest. In order to invest properly there are important factors to keep in mind, starting with creating a financial plan, developing short and long term goals, and creating a diversified portfolio. Once finances are stable and goals are established, you can focus on using diversification to control investment risk, which is critical when designing a successful portfolio.
A diverse portfolio spreads investments among different economic segments. When trying to control the risks involved in investing, keep diversification, consistent investing, and time horizon in mind.
Spread investment funds among assets such as:
- short-term investments
- international investments
- real estate
- cash or cash equivalent
- in different securities within each asset category.
This can assist in protecting an investor from unnecessary risk. If one investment were to lose money, other investments in a different class or category may be able to make up for the loss.
In addition to diversification, consistent investing is another way to control investment risk. Dollar-cost averaging is an important investing principal where you invest the same amount of money into an investment every month. Doing this means buying when shares are high and low. Since markets typically rise over time, this strategy can help you come out ahead.
Time can also reduce the risk of investing. Time horizon is how long an investor expects to invest before reaching financial goals. An investor with a longer time horizon is more likely to take risks because they are waiting out the lows and highs of the market, which may result in higher returns over time.
Diversifying does not mean invest in everything you can get your hands on. Investors should only undertake what they can afford, or afford to lose. The term “quality over quantity” goes well with the idea of choosing investments. Investor’s strategies and portfolios will always differ. Working closely with a financial professional can help investors develop and diversify their portfolios, and get the most out of their investments. As always, seek professional help.